Covid lockdown and force majeure. Sale of vessel for demolition

The emergence of the COVID pandemic in March 2020 led to a great interest in commercial circles as to the effect on their contracts of force majeure clauses. One such case is NKD Maritime Ltd v Bart Maritime (No. 2) Inc [2022] EWHC 1615 (Comm) (24 June 2022) which involved the sale of a vessel for demolition on the beaches of India at the time the world was waking up to the pandemic.

On 5 March 2020 Bart Maritime concluded a MOA with NKD for the sale of a ship for scrapping in India with delivery to be at “outer anchorage Alang”. An initial payment of 30% of the purchase price was made and the vessel sailed to India but due to the risk of COVID the vessel was refused entry to the Gulf of Khambat Vessel Traffic Scheme (VTS) on 21 March 2020. Shortly afterwards India went into lockdown on 25 March 2020 which was extended on 14 April 2020 for a further 15 days. During this time the vessel was waiting some 100 nautical miles off Alang and on 14 April the buyers purported to cancel pursuant to cl.10 which gave either party the right to terminate the contract “should the Seller be unable to transfer title of the Vessel or should the Buyer be unable to accept transfer of the Vessel” due to (among other things) “restraint of governments, princes, rulers or people of any nation”. Owners claimed that this amounted to a repudiation and claimed retention of the initial payment as well as damages.

Three issues arose before Butcher J. First, did clause 10 operate so that transfer of title meant that there had to be a delivery of the vessel? Butcher J held that NKD were not entitled to cancel pursuant to cl.10 as, although delivery was affected by the COVID restrictions, these did not affect the ability of the seller to transfer title of the vessel. Transfer of title required payment of the price, delivery of the bill of sale and deletion from the relevant ship’s registry, and the COVID delays did not render Bart unable to transfer title. The MOA referred to both delivery and transfer of title, but they were not interchangeable terms and sometimes the terms appeared in the same clause meaning different things.

Second, if, contrary to the first finding cl.10 did require delivery as part of transfer of title, had there been a delivery as of 14 April? The vessel was not delivered at the delivery location as she had been told  not to enter the Vessel Traffic Scheme, and had anchored some 100 nautical miles off Alang.  However, there had been delivery pursuant to the substituted delivery provisions in cl.2 (a) of the MOA which provided

“[t]hat “if, on the Vessel’s arrival, the Delivery Location is inaccessible for any reason whatsoever … the Vessel shall be delivered and taken over by the Buyer as near thereto as she may safely get at a safe and accessible berth or at anchorage which shall be designated by the Buyer, always provided that such berth or anchorage shall be subject to the approval of the Seller which shall not be unreasonably withheld. If the Buyer fails to nominate such place within 24 (twenty four) hours of arrival, the place at which it is customary for vessel (sic) to wait shall constitute the Delivery Location”.

The delivery location was clearly inaccessible and the vessel had ‘arrived’ as it had got as near as possible to the delivery location. Although waiting outside the VTS was not a customary waiting place, for the purpose of the clause it was a suitable place to wait given the order of the port authority for the vessel not to enter the VTS.

Third, if cl.10 did require delivery as part of transfer of title, and there had been no delivery, could the buyer rely on cl.10? There was clearly a temporary restraint of government, but that was insufficient to show that Bart had been ‘unable’ to transfer title. ‘Inability’ to perform for the purposes of clause 10 by reason of a temporary restraint of governments depended on whether the probable period of that restraint was such as materially to undermine the commercial adventure. “Inability” was not to be judged simply by reference to whether there was inability to perform by the contractual cancellation date.

An analysis similar to that undertaken as regards frustration was required. Relevant factors were: the sale contract was for demolition of the ship, not for its trading; demolition would take a year from delivery; some delays were to be anticipated in demolition given that there were only two times in the month that the tides were such as to enable the vessel to be beached; delays were not anticipated beyond the expiry of the lockdown on 3 May and on 15 April revised guidance was issued by the Indian Home Secretary which permitted certain activities, including shipbreaking, to resume as of 20 April. The Court noted that had the buyers not purported to cancel it is likely that the vessel would have arrived at Alang outer anchorage on 1 May.

Butcher J concluded that that NKD was not entitled to terminate the MOA on 14 April 2020, and in doing so it was in default under the MOA and had repudiated the contract. Bart was entitled to retain the initial payment and to claim further compensation to the extent to which the initial payment did not cover any losses which it had sustained as a result of NKD’s non-fulfilment of the contract.

The decision is particularly interesting as to the construction of force majeure clauses in regard to the effects of the pandemic on contractual performance, particularly as regards the analysis of whether these had caused an ‘inability’ to perform.

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